One in five UK citizens is expected to retire with an average debt of £33,900*. Being retired and in debt is a prospect no one wants to have to face, but it can happen to anyone. Homeowners are continuing to pay off mortgages later in life, support their family, and many will not have had company or private pensions to top up the state pension. Regular outgoings often make it difficult to save for the long term and many people end up with no money for retirement. Here is what to do.
How to deal with debt in retirement
The key thing to do is to deal with it as soon as possible, as it won’t go away by itself. Here are some ideas for how to pay off debt when you no longer have a regular income.
Prioritise your debts
Work out which debts need to be paid first, as some will be more pressing than others with higher rates of interest and could lead to problems if they remain unpaid. Generally, mortgage, rent and utilities are the highest-priority debts as they could lead to you losing your home. Arrange a suitable timescale to pay it off if you can. A debt management plan (DMP) can help you make regular reduced payments to credit cards, overdrafts or loans over a set period.
Consolidate your debts into one place
If you have multiple credit card or loan debts, it may be easier to manage them if they were combined into one single debt, with a single creditor and an agreed debt action plan. A balance transfer credit card can be useful, as it gives you more time to pay off credit card debt without having to pay interest if you make the minimum monthly payment.
Ways to free up cash in retirement
Downsize to a smaller home
However, not everyone wants to move, and if you prefer to remain in your own home, another way to free up cash is to release a portion of its equity.
Equity release with a lifetime mortgage
Equity release is a simple way to free up a lump sum from the value of your home without having to touch your pension fund, and guarantees you can continue to live in your home. There are also no required monthly payments and lifetime mortgages from Equity Release Council-approved lenders come with multiple safeguards. This means that here will be a no-negative-equity guarantee included so that you can never owe more than the value of your home and will not be able to leave any lifetime mortgage debt to your loved ones.
A lifetime mortgage is secured against your main residence, as long as you (and your partner) are at least 55 years old. The mortgage is repaid when you die or go into long-term care, and can be repaid through the eventual sale of your home. To find the right lifetime mortgage, speak to a qualified and experienced independent financial adviser, one registered by the Financial Conduct Authority (FCA) and not tied to one particular provider.
It’s an increasingly popular way to deal with debt. Equity release providers Responsible Life found that homeowners initially released an average of £76,000 in 2019.
It is important to remember when releasing equity that you balance current needs with future wants. Think carefully before releasing equity from your home, as it may impact the value of your estate and could affect your entitlement to means-tested benefits. Furthermore, by consolidating your debts into a mortgage you may be required to pay more over the entire term than you would with your existing debt. To understand the features and risks, ask for a personalised illustration from an adviser. Fortunately, there are a wide range of plans available, some come with features which enable you to alleviate the impact of a lifetime mortgage on your estate.
Are you due any benefits or lost pensions?
Senior citizens have access to more benefits than many may realise. Attendance allowance, Council Tax support, free local travel, Pension Credit, and many more. There is also a high chance that over-65s may have unclaimed savings — the DWP says there is £400 million in unclaimed pension savings, With so many of us having had several jobs over our working lives, there are a vast number of small pension pots that remain unclaimed. Use the government’s Pension Tracing Service to help you find any lost workplace pensions that you may have long since forgotten about.
Get free debt advice
No one should have to struggle with debt, especially in retirement. Free debt advice is available from organisations such as National Debtline, Citizens Advice Bureau and the StepChange Debt Charity.
Could equity release help you deal with debt in retirement?
- Discover how much tax-free cash you could release from your home with the Telegraph’s easy instant equity release calculator
The above article was created for Telegraph Financial Solutions, a member of The Telegraph Media Group. For more information on Telegraph Financial Solutions click here.
The Telegraph Equity Release Service is provided by Responsible Equity Release. Responsible Equity Release is a trading style of Responsible Life Limited. Responsible Life Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (https://register.fca.org.uk/) under reference 610205. Only if you choose to proceed and your case completes will Responsible Life Limited charge an advice fee, currently not exceeding £1,490.
By consolidating your debts into a mortgage, you may be required to pay more over the entire term than you would with your existing debt.
* Data source
Information correct at date of publication.